B Pty Ltd v Sutton

Case [2020] FCCA 3068

FEDERAL CIRCUIT COURT OF AUSTRALIA

B Pty Ltd v Sutton [2020] FCCA 3068

File number(s): SYG 73 of 2020
Judgment of: JUDGE MANOUSARIDIS
Date of judgment: 13 November 2020
Catchwords:

BANKRUPTCY – bankruptcy notice – whether at the time bankruptcy notice was issued there was in force an implied stay of execution of the judgment on the basis of which the bankruptcy notice was issued because freezing orders were in force restraining the debtor from dealing with property – whether but for the freezing orders the debtor could and would have complied with the requirements of the bankruptcy notice – no implied stay of execution of judgment – debtor did not discharge burden of proving that but for the freezing orders the debtor could and would have complied with the requirements of the bankruptcy notice.

BANKRUPTCY – creditor’s petition – whether the debtor has proved he is able to pay his debts – whether the debtor has reasonable prospects of succeeding on a proposed ground that an appeal against a judgment given in a family law proceeding in relation to property is a sufficient cause for not making a sequestration order – no reasonable prospects.

BANKRUPTCY – PRACTICE AND PROCEDURE – application by debtor for adjournment of hearing of creditor’s petition to enable debtor to put on evidence and also pending the determination of an appeal against orders made in a family law proceeding – whether there would be any utility in granting the adjournment – no utility – application for adjournment dismissed.

Legislation:

Bankruptcy Act 1966 (Cth), ss.41(3)(b), 43, 47, 52(1), 52(2)(a), 52(2)(b), 156A

Family Law Act 1975 (Cth)

Federal Circuit Court (Bankruptcy) Rules 2016 (Cth), rr.4.02(1), 4.02(2), 4.04(1)(a), 4.04(1)(b), 4.05, 4.06(3), 4.06(4)

Cases cited:

Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23

Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728

Ahern v Deputy Commissioner of Taxation (QLD) [1987] FCA 312; (1987) 76 ALR 137

(2019 NSWSC Judgment)

(2020 NSWSC Judgment)

Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8

Deputy Commissioner Of Taxation v Caporale [2013] FMCA 5

Deputy Commissioner of Taxation v Mei Mei Yan (aka Quinnie Wong) [1998] FCA 783

Liang v LV Property Investments Pty Ltd [2015] FCA 1057

Ling v Enrobook Pty Ltd (1997) 143 ALR 396

Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303

National Australia Bank Ltd v Pollak [2001] FCA 1408

Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568

Re Eddie Solomon Ex Parte: John Ralph Reid [1986] FCA 179

Re Ling, Ex parte Enrobook Pty Ltd (1996) 142 ALR 87

Re Ousely; Ex parte Commissioner of Taxation (1994) 48 FCR 131

Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111

Re Sedgwick; Ex parte Sedgwick (1888) 5 Morr 262

Rigg v Baker [2006] FCAFC 179

Rotstein & Associates v Slaveski [2010] FCA 493

Sandell v Porter (1966) 115 CLR 666

Sylvia Boscolo v Botany Council [1996] FCA 897

Wiltshire-Smith v Mellor Olsson (1995) 57…

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AGLC
B Pty Ltd v Sutton [2020] FCCA 3068
Case
[2020] FCCA 3068
Decision Date

CaseChat Overview and Summary

In B Pty Ltd v Sutton, heard in the Federal Circuit Court of Australia, the applicant creditor sought the sequestration of the respondent debtor's estate based on a failure to comply with a bankruptcy notice. The respondent opposed the creditor's petition on several grounds, including that freezing orders in place prevented compliance with the bankruptcy notice, that he was able to pay his debts, and that an appeal pending in the Family Court of Australia constituted sufficient cause for not making a sequestration order. The respondent also sought an adjournment of the hearing to prepare further evidence and await the outcome of the Family Court appeal.

The court was required to determine whether the freezing orders in force created an implied stay of execution of the judgment upon which the bankruptcy notice was based, thereby excusing the debtor's non-compliance. Additionally, the court had to consider whether the debtor had discharged the onus of proving he could and would have complied with the bankruptcy notice but for the freezing orders. The court also needed to assess whether the debtor had proven he was able to pay his debts and whether his pending appeal in the Family Court presented a sufficient cause to prevent the making of a sequestration order. Finally, the court had to decide whether granting an adjournment would serve any utility in light of the other issues.

The court reasoned that the freezing orders did not create an implied stay of execution of the judgment, and therefore, the respondent's non-compliance with the bankruptcy notice constituted an act of bankruptcy. The court found that the respondent had not discharged the burden of proving that, absent the freezing orders, he could and would have complied with the bankruptcy notice. Furthermore, the court determined that the respondent had not demonstrated he was able to pay his debts and that his pending appeal in the Family Court did not offer reasonable prospects of success as a ground for opposing the sequestration order. Consequently, the court concluded that there would be no utility in granting an adjournment.

Accordingly, the court dismissed the respondent's applications to adjourn the hearing and to rely on the pending appeal as a ground of opposition. The court ordered the sequestration of the respondent's estate and directed that the applicant creditor's costs be paid from the estate. The date of the act of bankruptcy was noted as 9 December 2019.

Orders

Orders of the court

THE COURT ORDERS THAT:

1. The applications by the respondent, Mr Sutton, to adjourn the hearing of the creditor’s petition are dismissed.

2. The application by the respondent, Mr Sutton, for leave to rely as a ground of opposition that an appeal pending in the Family Court of Australia constitutes a sufficient cause for not making a sequestration order is dismissed.

3. The estate of the respondent, Mr Sutton, is sequestrated under the Bankruptcy Act 1966 (Cth).

4. The applicant creditor’s costs (including any reserved costs) be taxed and paid from the estate of the respondent, Mr Sutton, in accordance with the Bankruptcy Act 1966 (Cth).

THE COURT NOTES THAT:

5. The date of the act of bankruptcy is 9 December 2019.

6. A consent to act as trustee signed by Mr J and Mr K has been filed under s.156A of the Bankruptcy Act 1966 (Cth).

7. A copy of these orders is to be provided to the Official Receiver in Sydney within two business days.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

It is also useful to refer to the following passage from the judgment of the Full Federal Court in Culleton v Balwyn Nominees Pty Ltd:[71]In considering the question of an adjournment of the hearing of a creditor’s petition, it is fundamental to keep firmly in mind, at all times, the nature of the jurisdiction. Bankruptcy is not just a variety of inter partes litigation; it does not deal only with the private rights and obligations of the debtor and creditor; it is not a form of judgment execution. It is directed to the estate of a person who is insolvent. In that sense it has a public interest, through the general body of creditors and potential creditors of the debtor and prospective bankrupt, and through what is referred to as the change of status of the person who becomes a bankrupt. That status is changed because of the provisions of the Act which inhibit conduct and affect rights and obligations of the bankrupt, including making the bankrupt susceptible to criminal punishment for what would otherwise be innocent conduct.[71] Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8, at [40]Adjournment to put on evidence of sales of the K shares? The respondent has sought a short adjournment for the purpose of preparing evidence relevant to establishing the value of the K shares. Counsel for the respondent indicated that the evidence he was instructed the respondent can and, if granted a short adjournment, would adduce is evidence of past sales of the K shares. It appears the respondent intends to submit that the price or prices at which the K shares have been transferred reflects the value of the K shares. I will first consider the position on the assumption that the respondent will, if granted a short adjournment, adduce evidence that will show that the K shares have been sold. Would this be of any utility to the respondent because the granting of an adjournment would confer on the respondent a tangible prospect of succeeding on any of the Grounds of Opposition? That question is to be answered in the negative. First, I have concluded the Orders do not in any way limit the applicant’s ability to exercise its remedies as judgment creditor, including immediate execution against the respondent’s property; and, for that reason, the Orders do not constitute an implied stay of execution of the Judgment. The respondent’s filing evidence of the value of the K shares, therefore, could not affect that conclusion. That means that the respondent’s filing evidence of the prices at which the K shares have been sold will not improve the respondent’s prospects of succeeding on the ground that relies on the bankruptcy notice not being valid because of the operation of the Orders. Second, the respondent assumes that the value of the K shares may be inferred from the price at which the K shares have been sold. Counsel for the respondent did not, however, say that the respondent also intends to adduce expert evidence to show that the value of shares in a private company can be directly inferred from the price at which shares in such company have been sold. In the absence of expert valuation evidence, I would not be prepared to assume that that is a legitimate valuation method for valuing shares in a private company. That assumption would be contrary to what has been said in authorities about the method by which shares may be valued. In Abrahams v Federal Commissioner of Taxation, for example, Williams J said that where shares are not publicly listed “final assessment of the value of the shares must be made principally on the basis of the income yield . . . but where, owing to exceptional circumstances, the valuation on this basis presents “enormous difficulties” it is legitimate . . . to rely more than usual on the assets value”.[72][72] Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23, at page 42 (Williams J)

Decision

Reasons for decision

The act of bankruptcy on which the applicant relies is the respondent’s failure to comply with the requirements of a bankruptcy notice issued on 5 November 2019, and served on the respondent on 18 November 2019. The bankruptcy notice demanded payment of $ (amount omitted) (Judgment Debt) within 21 days after service. That is the amount for which judgment (Judgment) was entered against the respondent on … 2019 in a proceeding the applicant brought against him in the Supreme Court of New South Wales (Supreme Court proceeding).[1] The respondent did not comply with the requirements of the bankruptcy notice.[1] (2019 NSWSC Judgment) The respondent opposes the making of a sequestration order on three grounds. First, he contends he did not commit an act of bankruptcy by not complying with the requirements of the bankruptcy notice; and that is because the respondent submits he was prevented from doing so by an order this Court made on 16 September 2019 in a proceeding (Family Law proceeding) the respondent brought under the Family Law Act 1975 (Cth).[2] Second, the respondent contends he is able to pay his debts.[3] Third, the respondent has filed an appeal (Appeal) with the Family Court of Australia against the final orders made on 7 August 2020 in the Family Law proceeding (Family Law Proceeding Orders); and the respondent contends this constitutes a “sufficient cause” why a sequestration order ought not be made within the meaning of s.52(2)(b) of the Act.[4][2] Notice stating grounds of opposition to petition, [2][3] Notice stating grounds of opposition to petition, [1][4] This ground is not stated in the respondent’s “Notice stating grounds of opposition to petition”; but the respondent seeks leave to rely on it. The matter came before me for hearing on 5 November 2020. The respondent, by his counsel, applied for an adjournment of the creditor’s petition until after the determination of the Appeal. The respondent submitted the adjournment is necessary because he will be constrained in his ability to make good the second and third grounds on which he relies unless the outcome of the Appeal is known. I indicated I would hear the application for an adjournment, together with all other questions, on the assumption that I would not grant the adjournment; and I indicated I would reserve my judgment on the respondent’s application for an adjournment together with all other issues. Late into the hearing, counsel for the respondent applied for a short adjournment to enable the respondent to put on evidence to support the assertions of value the respondent attached to shares in K Pty Ltd. I reserved my judgment on that application for an adjournment. I will proceed as follows:(a)First, I will set out the relevant background, the essential elements of which are not in dispute. (b)Second, I will consider whether, subject to the respondent’s contention that his non-compliance with the bankruptcy notice did not amount to an act of bankruptcy, the applicant has satisfied the matters it is required to satisfy under s.43 and s.52(1) of the Act, and under the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) (Bankruptcy Rules).(c)Third, I will consider each of the grounds on which the respondent relies on the assumption the respondent will not be granted an adjournment for either of the two purposes for which the respondent has applied for an adjournment.(d)Fourth, to the extent I conclude the respondent will not succeed on any of the grounds on which he relies, I will consider whether an adjournment may afford some prospect of the respondent succeeding on any of the grounds on which he relies and, if so, whether, in the exercise of my discretion, I should grant the respondent the adjournments he seeks.BACKGROUND

Ratio Decidendi

Legal Principle Established

The respondent seeks the following orders if the Appeal is successful:1.That Orders made 7 August, 2020 be discharged2.That in lieu of the Orders made 7 August, 2020 Orders be made that are Just and Equitable.3.That Orders made on 14 August 2018 and 16 September 2019 as to the injunctions be discharged.4.Such further and other Orders as this Honourable Court deems meet.5.[DFW] pay the costs of the [respondent].6.The [respondent] reserves his right to add to, amend and or otherwise substitute Orders sought prior to the hearing of this appeal.PRECONDITIONS FOR MAKING SEQUESTRATION ORDER As I have already noted, the act of bankruptcy on which the applicant relies is the respondent’s failure to comply with the requirements of a bankruptcy notice that was issued on 5 November 2019. The bankruptcy notice was served on the respondent on 18 November 2019;[24] and, as I have also already noted, the respondent did not comply with its requirements. Thus, subject to the respondent’s contention that he did not comply with the requirements of the bankruptcy notice because the Orders prevented him from doing so, the respondent will have committed an act of bankruptcy on 9 December 2019.[24] Affidavit of service of bankruptcy notice, DDDD 12.12.2019 The applicant filed a creditor’s petition on 10 January 2020. The application has been filed in accordance with the prescribed form,[25] and, as required by s.47 of the Act and r.4.02(2) of the Bankruptcy Rules, an affidavit verifying the creditor’s petition has been made.[26] The applicant also filed at the time it filed the creditor’s petition an affidavit as required by r.4.04(1)(a) of the Bankruptcy Rules;[27] and, as required by r.4.04(1)(b), an affidavit of service of the bankruptcy notice.[28] In addition, the applicant filed a “Trustee Consent to Act Declaration” signed by Mr J and Mr K under s.156A of the Act. As required by r.4.05 of the Bankruptcy Rules, the creditor’s petition was served on the respondent, together with an affidavit as required by r.4.04(1)(a) of the Rules, and the affidavit of service of the bankruptcy notice.[29] This occurred on 13 February 2020, being more than five days before the date fixed for the hearing of the creditor’s petition. Finally, the applicant filed an affidavit of debt,[30] being an affidavit required under r.4.06(4) of the Bankruptcy Rules and an affidavit of search as required by r.4.06(3) of the Bankruptcy Rules. [25] Bankruptcy Rules, r.4.02(1); Form B6[26] Affidavit verifying creditor’s petition of Mr IIII 11.03.2020. In paragraph 1 of that affidavit Mr IIII deposes he is a director of the applicant.[27] Affidavit verifying paragraph 4 of petition of HHHH 10.01.2020[28] Affidavit of service of bankruptcy notice, DDDD 12.12.2019[29] Affidavit of EEEE 25.02.2020[30] Affidavit of debt of Mr IIII 04.11.2020 I am satisfied that, subject to the respondent’s contention that he has not committed an act of bankruptcy, the applicant has proved the matters it is required to prove under s.43 and s.52(1) of the Act, and under the Bankruptcy Rules.PREVENTED FROM COMPLYING WITH BANKRUPTCY NOTICE?